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UNCLAS SECTION 01 OF 03 SAO PAULO 000899 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC, EEB/IFD/OIA 
STATE PASS USTR FOR KATE DUCKWORTH 
STATE PASS FED BOARD OF GOVERNORS FOR ROBITAILLE 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DEMROSE, NRIVERA, CMERVENNE 
NSC FOR TOMASULO 
TREASURY FOR JHOEK 
USDOC FOR 4332/ITA/MAC/WH/OLAC 
USDOC ALSO FOR 3134/USFCS 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON BR
SUBJECT: BRAZILIAN STOCK EXCHANGE IPO LARGEST IN HISTORY 
 
REF: 06 SAO PAULO 970 
 
Summary 
------- 
¶1.  (U) The Brazilian Stock Exchange's (Bovespa) initial public 
offering (IPO) last month was the largest in Brazil's history, 
bringing in nearly USD 4 billion.  Bovespa representatives told 
Econoff that its IPO raised its international profile and increased 
its worldwide credibility as a premier exchange.  Bovespa spent more 
than a year restructuring the company in preparation for what became 
Brazil's 56th IPO in 2007.  Bovespa's IPO was considered a secondary 
IPO, meaning that the company didn't raise any new financing; 
Bovespa's existing shareholders sold their shares to new buyers in a 
public marketplace.  The larger purpose of initial public offerings 
in Brazil is to help improve corporate governance and disclosure. 
Brazilian media are widely speculating that Brazil's Futures and 
Commodities Exchange (BM&F) will be the next big IPO later this year 
or early in 2008.  Although the trend of IPOs in Brazil is generally 
positive, some of Brazil's IPOs do not meet minimum U.S. investment 
standards.  End Summary. 
 
Bovespa Largest Brazilian IPO in History 
---------------------------------------- 
¶2.  (U) On October 26, Brazil's stock exchange, the Bovespa, became 
a publicly traded company by inaugurating itself as the 56th 
Brazilian initial public offering (IPO) this year and the exchange's 
largest IPO in its history.  Bovespa is the largest equity market in 
Latin America and the 5th largest in the world based on market 
capitalization, worth about USD 14 billion, and behind only the 
Chicago, Hong Kong, Frankfurt, and New York (NYSE) exchanges.  The 
IPO was successful by all accounts, with a high subscription rate 
and a 52 percent price appreciation from its pre-offer level.  In 
total, Bovespa's IPO garnered USD 3.75 billion, about USD 1 billion 
more than Redecard, a Brazilian financial services company, in its 
IPO earlier this year. 
 
¶3.  (U) Press reports said that the demand for Bovespa's stock 
spurred the largest trading volume registered to date, about half 
for Bovespa's stock.  Foreign investors purchased 80 percent of the 
initial offering, and Bovespa's Listing and Issuers Development 
Manager Wang Jiang Horng told Econoff that about half of the 
exchange's daily foreign participation is by U.S. investors. 
 
¶4.  (U) Bovespa barred investors who had participated in Brazilian 
IPOs between August and October and had sold 20 percent or more of 
their shares on the first day of trading from participating in this 
offering.  This represents a new effort to prevent speculators from 
driving down the opening day share price.  Press reports indicated 
the Brazilian securities exchange commission, Comissao de Valores 
Mobiliarios (CVM), ruled the decision within the bounds of capital 
market regulations and said that it could become an operating 
standard. 
 
¶5.  (U) Company representatives told Econoff that Bovespa views its 
IPO as a key strategic step toward becoming a premier exchange; the 
IPO raised its international profile, strengthened its investor 
base, and elevated corporate governance standards and transparency 
in Brazil.  The IPO also opens the door to international 
partnerships and facilitates Bovespa's capacity to raise future 
capital. 
 
Part of a Larger Trend in IPOs 
------------------------------ 
¶6.  (U) Bovespa's Horng told Econoff that her team has been 
overwhelmed with applications for Brazilian IPOs this year. 
Bovespa's IPO was the 56th this year, and CVM has another 31 
currently under review.  Last year there were 26 IPOs, and nine and 
seven in 2005 and 2004, respectively, but only six between 1995 and 
 
SAO PAULO 00000899  002 OF 003 
 
 
¶2004.  Before 2002, investors were uninterested in Brazilian IPOs 
because of structural barriers and a lack of confidence in the 
Brazilian stock market.  However, in 2000 Bovespa introduced the 
Novo Mercado (New Market), Brazil's newest exchange tier with the 
most stringent corporate governance requirements, to encourage 
investment (reftel). 
 
¶7.  (U) To "go public", traditionally private family companies in 
Brazil must undergo drastic changes, including bringing in new 
management and investors, and developing the legal and accounting 
frameworks necessary to apply to the CVM and Bovespa for 
consideration.  Bovespa Holding, for example, spent a year and a 
half preparing for its IPO.  Horng told Econoff that the CVM and 
Bovespa have 30 days to provide comments and mandatory 
recommendations on a company's initial IPO application.  After that 
companies have five days to comply with their recommendations.  From 
there, a company goes on a "road show" to market itself to investors 
worldwide for another two to three weeks. 
 
Brazilian Market Differences 
---------------------------- 
¶8.  (U) Brazilian IPOs can be primary or secondary market offerings. 
 Primary offerings are similar to IPOs in the U.S., however, in 
secondary offerings, including Bovespa's own IPO, no new net 
financing is raised because no new shares are sold.  Existing 
shareholders profit from the IPO by selling to new buyers, while the 
company itself does not profit from the offering. 
 
Pushing Corporate Governance 
---------------------------- 
¶9.  (U) The growth in IPOs has encouraged better corporate 
governance within Brazil's financial market, as investors push 
companies by considering corporate governance in their company 
valuations.  As part of a broader effort by Brazilian authorities to 
professionalize the exchange, companies pursuing IPOs are required 
to justify to CVM and Bovespa when they choose not to list under the 
tougher Novo Mercado standards.  The Novo Mercado has been the main 
driver for improving Bovespa's credibility, and 70 percent of IPOs 
in 2007 have listed on the Novo Mercado.  (Note: Of Bovespa's four 
exchange tiers, three have disclosure standards.  End Note.) 
 
¶10.  (U) Brazilian pension funds are increasing their exposure to 
equity, which should increase Bovespa's yearly volume by USD 10 to 
13 billion over the next three years.  Bovespa is developing Bovespa 
Mais, a new market segment that will bring small and medium firms to 
market.  (Note: "Mais" means "more" in Portuguese.  Ninety percent 
of Brazilian companies are small or medium enterprises based on 
sales revenues.  End Note.)  Bovespa first launched the idea more 
than a year ago, but has been awaiting CVM regulatory approval. 
 
¶11.  (U) Market insiders expect the next high-profile IPO to be 
Brazil's Futures and Commodities Exchange (BM&F).  Earlier this 
month, the Chicago Mercantile Exchange Group (CME) signed a letter 
of intent to purchase 10 percent of BM&F's stock in exchange for two 
percent of CME. 
 
Comment 
------- 
¶12.  (U) Bovespa's IPO was hugely successful and should be viewed as 
signal of the sustained interest in Brazilian financial assets. 
Brazilian IPOs have generally high subscription rates and 
international financial markets appear to welcome the continued 
trend.  IPOs are helping reduce the concentration of family-owned 
companies in Brazil, but should be evaluated with caution, as the 
lower market tiers do not meet U.S. disclosure requirements.  End 
Comment. 
 
¶13.  (U) This cable has been cleared by Embassy Brasilia. 
 
SAO PAULO 00000899  003 OF 003 
 
 
 
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